Two years ago, we were in the depths of the recession. The markets were plummeting, the economy was on life support… And the American consumer looked like Rocky Balboa after his first fight with Apollo Creed!
It was bloody…
Here we are, a mere 2 years later and it’s certainly brighter out. Now, I’m not talking about the great weather we’re having… sunny and 80 degrees is hard to beat (and great for golfing). But what’s brighter in my mind is the outlook for the economy.
How can I tell?
I can just feel it… can’t you?
For the longest time, people have tried to put a number on the economic outlook. They’ve struggled to quantify an outlook for the future of the economy. Then in 1967 a group called
The Conference Board started a mail survey on the health of the economy… but they did it a little differently.
They decided to look at it from the perspective of the consumer. This is a key point and you’ll see why in a moment. But back to our story…
By the 1970s, the survey morphed into a monthly collection of data. And most importantly, the Conference Board started publishing their findings. Today, this simple survey is closely followed by investors, traders, and economists all over the world. It’s been a reliable measure of consumer confidence for decades.
This isn’t easy. You have to appreciate the importance of measuring the consumer’s mood.
You’re trying to measure feelings and perception.
Your emotions play a key role in your thinking and actions. And those thoughts influence the economy.
Let me give you an example…
When April 15th comes around you get mad at the tax guy and all the wasteful government spending. You suddenly see the cost of taxes directly impacting you… and you don’t want to pay as much! This feeling causes some people to “Cheat” on their taxes.
Others simply stretch the truth!
That’s a perfect example of an emotion impacting your finances… here’s another.
Think about your last Christmas bonus (or year-end bonus – if you want me to be Politically Correct). When bonuses were big you felt great… you felt safe… you felt secure.
You became very confident in your decisions as a consumer. You felt joy when you bought a new car. Or you felt excited buying furniture for the house.
You got a great deal of satisfaction buying new golf clubs, a new wardrobe, or the fancy watch you’d been eyeing.
When you made those decisions as a consumer you had a lot of confidence.
You’re not going to rush out and buy a new car unless you’re confident in your finances.
You need to have a base level of confidence in your future… your job… your earnings potential… and ultimately in the economy.
Now take your thoughts and feelings about spending money and multiply them by a hundred million people. You start to get an idea of just how powerful the American consumer is… and why their outlook on the economy is so important. It’s also why The Consumer Confidence Numbers are so important!
So let’s answer one key question… why should you care about the confidence of the consumer?
It’s really simple, and can be summarized in one key fact. More than 70% of all economic activity in the United States starts with the consumer. The coffee at Starbucks you buy… the t-shirt from Target… the food from Safeway. Your Ford pick-up truck, the restaurant you dined at last night. The local pizza joint… the beer you buy.
The success of all these companies and products depend on consumer spending.
And when the consumer isn’t happy, ain’t nobody happy.
Just look at the consumer confidence numbers back in December of 2008. The consumer confidence number sat at a pathetic reading of 38. This was worse than the readings during the recession of the early 1970s.
Clearly, we’d hit the depths of the economic collapse. And it was painful.
The apocalypse was upon us. Talking heads on TV called for the end of the world! Bank failures were rampant. Job security was non-existent, and unemployment was steadily moving higher. Home foreclosures were skyrocketing. Restaurants closed for want of customers. Car dealerships begged for buyers. Retail stores closed.
Consumer spending ground to a halt.
Now this is important. Which areas of the economy were hit the hardest?
In my opinion, some of the hardest hit industries were restaurants, casinos, hotels, and of course, banks and real estate. Who else got hammered?
Anyone relying on consumers spending “disposable” income…
Coffee shops took a hit as consumers brewed at home. High end grocery stores watched customers flee for cheaper “middle of the road” food. Restaurants were hurt as families ate out less.
But that’s not all.
High end jewelers, auction houses, and even retailers were punched in the face. Car dealerships were crushed. And oil and gas companies suffered as demand for gasoline fell.
Everyone was driving less.
Businesses closed up literally overnight. Do you remember Circuit City, Linens ‘n Things, or Washington Mutual? Gone, gone, and gone.
It was looking bleak at the end of 2008.
Just a few short months later, consumer confidence numbers bottomed out and started moving higher. And so did the stock market.
By December of 2009 consumer confidence rallied from 38 to over 53.
By December of 2010 consumer confidence surged to just over 63.
The economy is showing signs of life and some areas are starting to thrive. The turnaround came none-too-soon if you ask me.
Right now, consumer confidence numbers are reaching new highs… levels not seen in years. And that’s great news for investors all around the globe. And it’s going to be a great thing for your trading account… here’s why.
Despite the confidence numbers almost doubling, we’re still a good bit away from “normal.” Many consider a reading of 90 or above good for the economy. I’ve got no doubt we’ll be back to those levels in a few years.
What it means is we’re going to see consumer spending expand in the coming quarters.
The economy is improving every day. Consumer confidence is improving. And stock prices are heading even higher. Now this is where I tie everything together… so pay attention!
Remember all those industries nearly destroyed in the recession? As consumer spending jumps, we will see these areas of the market rebound the fastest.
The thinking is simple… what’s one of the first thing consumers cut back on during the recession? Dining out. Instead of dining at the fancy steakhouse, or taking the family out for a Wednesday night dinner, consumers started eating at home.
Amazingly, a nice dinner out is a fast and easy way to satisfy a consumer.
The value factor is strong too. It’s hard to justify spending $35,000 for a car, when you can get a big level of satisfaction buying dinner for $35 bucks at the local restaurant.
Another area set to rebound is the retail stores.
Many people stopped shopping all together. They cut back on their trips to the mall. They even downshifted to cheaper brands. The high end stores suffered as consumers took a break.
Now many consumers feel deprived. They long for the days of buying anything they want…
We’re already seeing customer numbers improve in the retail sector.
So where else does consumer confidence play a role?
There are lots of other industries that benefit from the rebound in consumer spending… unfortunately I don’t have the time to talk about all of them here. But I’m going to point you towards one other area many investors overlook.
Consider real estate. Now before you roll your eyes at me, I’m not talking about single family homes here.
Think about what I said earlier… We’re seeing more people driving to the malls and shopping centers. More consumers are visiting stores and buying stuff. And when retailers see a jump in spending, the big winners will be the shopping center owners!
That’s right. The Real Estate Investment Trusts who own shopping centers and stores will see retailers once again grow their footprint. Stores that were closed will see new life as new tenants are found. Better occupancy rates will lead to increased demand. And best of all, lease prices will start to climb once again.
Properly managed, these businesses will see windfall profits.
It won’t happen overnight… but when it does big money can be made.
Now you know why Consumer Confidence Numbers are so important… and how you can make big money from them. Remember to focus on companies set to rebound from increases in consumer spending. Do your research, and soon you’ll be banking the big winners!